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The Street
The Street
Brian O'Connell

Semiconductor Watchlist: Apple, AMD, Onsemi

The benchmark PHLX Index (SOX) began the week at 3,120.16, down 7.3% for the previous five sessions and 20.93% on a year-to-date basis.

With semiconductors under pressure, TheStreet’s Action Alerts Team points to several stocks that are either in the chip sector directly or that benefit from semiconductor manufacturing.

First up is electric vehicle maker Rivian Automotive (RIVN), which announced last Tuesday that it produced 2,553 vehicles and delivered 1,227 during the March quarter. The company said it’s well positioned to meet its guidance for full-year production of 25,000.

“We see this as a modest positive” for Amazon (AMZN) and Ford Motor (F), as both have equity stakes in Rivian, the AAP team said. “We also see it as confirming the need for charging stations.” That’s good for electric vehicle charging station network ChargePoint CHPT.”

Additionally, executives of semiconductor maker Analog Devices (ADI) say the company is capitalizing on the strong growth of electrification, digitization, automation, and connectivity. The company also lifted its long-term annual revenue growth target to 7% to 10%.

“That’s good news for chip stocks Nvidia (NVDA), Marvell Technology (MRVL), and Advanced Micro Devices AMD; ChargePoint; and Ford,” the team noted.

Add computer-memory maker Micron Technology (MU) to the list, as the firm reported earnings and guidance that beat expectations.

“Micron shared that memory and storage revenue has outpaced the rest of the semiconductor industry over the last two decades, and it expects this trend to continue over the next decade,” the Action Alerts PLUS team wrote. “Micron shared data center is now the largest market for memory and storage, eclipsing mobile, and it sees data center demand growth outpacing the broader memory and storage market over the next decade.”

Micron’s news also is positive for chipmakers Nvidia NVDA, Marvell Technology MRVL, Advanced Micro Devices and Skyworks Solutions (SWKS), the AAP team said.

It also saw good tidings for electric-vehicle-charging network ChargePoint. European grocer Carrefour  (CRERF)  plans to install many stations by 2025.

“We see this as part of the European opportunity for ChargePoint given estimates that point to Europe needing an estimated 65 million EV chargers … to handle the huge growth forecast in EVs … on Europe's roads,” the AAP team wrote.

TheStreet’s team of market analysts offer fresh takes on other semiconductor plays, with these stocks at the top of the list.

Apple AAPL $169.79. 5-day performance (-) 2.42%.

Apple (AAPL) seems “determined” to make life tougher for chip giant Intel (INTC), TheStreet’s Dan Weil reported.

“Apple is used to dealing with skeptics,” Weil said. “Each time the Cupertino, Calif., tech giant has said it would launch a new product in an already mature and saturated market, its announcements have been met with skepticism.”

That was the case with the iPhone and the iPad, and even more recently when it introduced the Apple Watch. After a hesitant start, sales of the smartwatch have taken off, helped by the health services Apple offers.

“Given this history, one would have thought that critics had learned their lessons and would give more credit to Tim Cook's company when Apple announced its chip ambitions, "Apple Silicon," in 2020,” Weil said.

Critics also thought that by talking about developing the chips for its laptops and desktop computers in-house, Apple was trying to force Intel's hand in dealings between the two tech giants.

“In view of Apple's recent announcements, it is clear that they were very mistaken,” Weil added.

Apple recently launched the M1 Pro and M1 Max chips alongside its new MacBook Pro laptops. Now, the company is taking things to a whole new level with the new M1 Ultra chip, presented on March 8 during the company's first big event of 2022.

The M1 Ultra, Apple said, is its most powerful variant of the original M1 chip lineup.

M1 Ultra will improve the performance of Mac desktop computers, Apple said. The M1 Ultra is built by connecting two M1 Max chips and is eight times faster than M1 chips, the company touted.

“To house the new chip, Apple unveiled the Mac Studio desktop and a new monitor called the Studio Display that can be paired with any Mac, including the MacBook Air and Macbook Pro models,” Weil noted. “Mac Studio is a new desktop computer aimed at creative professionals that promises plenty of power (and a hefty price tag).”

Mac Studio with the M1 Ultra is 80% faster than the fastest MacBook Pro, the company says. And the new chip is advertised as more powerful and more energy efficient than the three previous generations -- M1, M1 Pro and M1 Max. That feat puts Apple ahead of the competition.

"M1 Ultra is another game-changer for Apple silicon that once again will shock the PC industry," said Johny Srouji, Apple’s senior vice president of hardware technologies, in a news release. "M1 Ultra completes the M1 family as the world’s most powerful and capable chip for a personal computer."

The graphics part of the processor has evolved with a 32-core neural engine and a 64-core graphics-processing unit to run even the most demanding tasks, such as compiling code, transcoding video and working in huge 3D environments.

“This should normally end up improving performance by ensuring, among other things, good performance in all software that relies on artificial intelligence,” Weil said.

Advanced Micro Devices $100.00. 5-day performance (-) 6.62%.

Advanced Micro Devices is pulling back, putting the key $100 level in play.

But will it hold?

TheStreet’s Bret Kenwell is on the case.

“The semiconductor group has become a bellwether industry to watch for stock market investors,” he said last week. “As such, Nvidia, Advanced Micro Devices and others are now at the forefront of many investors’ trading screens.”

Late last year, that translated into good news, as AMD and Nvidia did a tremendous job bucking the bear market in the fourth quarter, surging to all-time highs. Eventually, however, the selling caught up with them though.

“Shares of AMD came tumbling down in January, ultimately bottoming near $100 in late January,” Kenwell said. “This was a robust support zone, not just because of it being psychologically relevant, but because it was a big breakout level for AMD. Since then, we’ve seen dips down to the low-$100s in February and March. However, each rally from this support zone seems to lose steam.”

It’s got investors wondering if a potentially larger dip could be in store.

For now, the stock continues to hold on tight, at $100 per share.

Last week, Kenwell noted the importance of the previous week’s low at $106.10. “If AMD were to lose that level, it would open the door down to the $100 support area,” Kenwell noted. (The stock did fall to $100 last week.)

Now struggling to regain momentum, keep a close eye on this zone. “If it fails, it could open the door down the low $90s,” Kenwell said. “Further, its failure at $100 would not be a great signal for Nvidia and other semiconductor stocks.”

Onsemi $52.00. 5-day performance (-) 11.57%.

Semiconductor stocks with robust exposure to the automotive and industrial industries look promising right now – especially one stock in particular.

“Following recent selloffs that I think have been driven in part by overblown macro fears, a number of quality chip companies look attractively priced,” said TheStreet’s Eric Jhonsa. “Arguably, Onsemi (ON) has one of the strongest risk/rewards among these firms.”

Onsemi, formerly known as ON Semiconductor, sells power semiconductors, image sensors, microcontrollers (MCUs), Wi-Fi chips and a slew of other products that go into everything from cars and factory equipment, to smartphones and IoT devices, to 5G base stations and cloud servers. Its rivals/peers include Texas Instruments (TXN) , Analog Devices ADI, NXP Semiconductors (NXPI), STMicroelectronics (STM) , Microchip Technology (MCHP), Renesas and Infineon.

Jhonsa believes there's a lot to collectively like about these companies right now. Most notably:

  1. The companies have moderate valuations. Following their recent declines, forward P/Es for the group are generally in the mid-to-high teens, while gross margins (GMs) typically range from the 40s to the high 60s.
  2. The companies currently have more demand than they can handle. Most of the aforementioned companies have talked about being supply constrained into 2023 and inking long-term supply agreements with major customers eager to secure capacity and move away from just-in-time inventory systems. “In addition, the companies have been hiking prices for many of their offerings, as they both pass on higher costs and benefit from a favorable supply/demand balance, ”Jhonsa said.
  3. The companies have clear long-term growth drivers. Though they operate in a cyclical industry -- one that might very well see its next down-cycle in 2023 -- their cycles should continue seeing higher highs and higher lows, thanks to the secular growth drivers they have in key end-markets. “Key ones include rising semiconductor content for cars, factory automation investments, IoT device proliferation and growing cloud capex,” he added.The companies generally have low exposure to softening consumer end-markets. Evidence has been piling up that demand for consumer notebooks, Chromebooks and low-end smartphones is slowing down.
  4. But companies such as Onsemi, TI and ADI have only modest exposure to these end-markets,” Jhonsa noted. “Rather, a majority of their sales come from automotive and "industrial" end-markets. ("industrial" is in parentheses here since it's used by these companies to describe not just chips used within, say, factory equipment, but also ones used within defense/aerospace equipment, medical devices, solar farms, and other non-consumer products).”

Jhonsa said that if he had to pick just one of these companies to invest in, he’d likely go with Onsemi, for a few reasons:

  1. Onsemi is one of the cheaper companies within its peer group. “Its shares trade for just 14 times a 2022 FactSet EPS consensus figure that (considering it's based on a revenue consensus that implies just 14% sales growth) looks beatable,” Jhonsa said.
  2. Onsemi is led by a relatively new CEO who has been overhauling the company. During his four-year run as CEO of Cypress Semiconductor (sold to Infineon in 2020), Hassane El-Khoury oversaw a turnaround in which Cypress shed or de-emphasized low-margin product lines, made shrewd acquisitions and dialed up investments in automotive and IoT growth markets. “He's been applying a fairly similar playbook to Onsemi since becoming its CEO in December 2020, and appears to be far from finished,” Jhonsa added.
  3. Onsemi has a strong margin-expansion story. Over its last five reported quarters, Onsemi's non-GAAP GM has risen from 34.4% to 45.2%, an increase that puts it slightly above the company's prior 2025 GM target of 45%. Higher sales and a good pricing environment have helped, but so have the efforts of El-Khoury and other execs to drive operational efficiencies -- in part by selling less-efficient manufacturing sites and moving more internal chip production to a 300mm wafer fab the company is acquiring from Globalfoundries GFS -- and shift Onsemi's sales mix towards higher-margin products.
    “Onsemi now has a 2025 GM target range of 48% to 50%, and (with some peers having GMs well above 50%) it wouldn't be a shock if the company also exceeded this goal before 2025,” Jhonsa said.
  4. Onsemi looks well-positioned to gain automotive chip share thanks to its EV and ADAS (advanced driver assistance systems)-related products. Onsemi is a major supplier of silicon carbide (SiC) power semiconductors and modules -- they can improve range, weight and charging times for electric cars relative to using silicon-based alternatives -- for EVs, EV chargers and industrial products.
    “The company is also a top supplier of image sensors and power management chips for automotive and industrial cameras, and it supplies sensing chips for automotive LIDAR sensors,” Jhonsa noted. “All of this leaves the company poised to take auto chip share as penetration rates for EVs and ADAS/autonomous driving features grow, as well as to see meaningful industrial growth.
  5. Onsemi has some M&A optionality. El-Khoury's last company was eventually acquired by a bigger chipmaker, and it's not out of the question that Onsemi, which currently sports a $26 billion valuation, could one day see the same fate.
    “Certainly, the company's status as a diversified U.S. chip manufacturer with strong EV, ADAS and SiC exposure doesn't hurt its attractiveness to potential suitors,” Jhonsa noted.
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